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The Commissioner Of Income Tax Versus Subrata Roy

2015 (3) TMI 767 - DELHI HIGH COURT

Deemed dividend u/s 2(22)(e) - CIT (A) held that SISICOL had advanced sums to a concern (the firm) in which the assessee had a substantial interest. and taking note that Section 2(22)(e) as applicable after its amendment w.e.f. from 31-05-1987, for AY year 1988-89, included concerns in which shareholder is a member or partner, the CIT (A) upheld the addition made - Held that:- Granted, the assessee is a shareholder of SISICOL; he is also a partner of the firm. However, neither did SISICOL give h .....

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OL) were really one transaction. It is also a matter of record that the firm had over 290 branches or units and collection by it exceeded- on an average ₹ 10 crores per month. Therefore, it could not be legitimately held that amount retained by the firm was for the assessee’s benefit. The amount of ₹ 1,84,19,305 was not deemed dividend in the hands of the assessee under the provisions of Section 2 (22) (e) of the Income Tax Act, 1961 - Decided in favour of assessee.

Revenu .....

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pted. - Decided against revenue. - ITA No.398/2010 , WP(C) 1162/2012 - Dated:- 17-3-2015 - S. Ravindra Bhat And R.K. Gauba JJ. For the Appellant : Mr. Rohit Madan & Mr. Ruchir Bhatia, Advocates. For the Respondent : Mr. Percy J. Pardiwala, Sr. Adv. With Mr. Satyen Sethi & Mr. Arta Trana Panda, Advocates MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. The question of law urged by the revenue in this appeal (and the writ petition) is: Whether the amount of ₹ 1,84,19,305 was deemed divid .....

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COL s schemes. The firm -in tune with its contractual obligations, had to remit ₹ 26,24,12,222/- on 31-03-1992, which it had collected and was payable to SISICOL. Between 01-04-1991, and 31-03-1992, the firm advanced ₹ 1,88,96,202/- to the assessee. The Assessing Officer (AO) held that the amount was a loan from SISICOL to the assessee through the use of the company's agent, the firm, which was a conduit and a device adopted to bypass application of Section 2(22)(e) of the Income .....

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king note that Section 2(22)(e) as applicable after its amendment w.e.f. from 31-05-1987, for AY year 1988-89, included concerns in which shareholder is a member or partner, the CIT (A) upheld the addition made. 4. The assessee carried the matter in appeal to the ITAT. There was a divergence of views of the two members who originally heard the appeal; the Judicial Member held that Section 2(22)(e) was inapplicable; the Administrative Member held to the contrary and that the provision was attract .....

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he 1987 agreement, it was noted that there was no time limit stipulated for remittance of amounts collected by the firm on behalf of SISICOL to it. The amounts were to be collected in the ordinary course of business. The affidavit of Shri O. P. Srivastava dated 06.07.1996 was also relied on; it stated that such sums collected and retained before remission by firm to the company, SISICOL, constitute neither loan nor advance . 6. The Judicial Member then considered the question whether credit bala .....

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t but every debt does not involve a loan. The distinction between a loan and a debt and the pre-requisite for a loan - being the existence of a lender, a borrower, a thing loaned for use and a contract between the parties for return of the thing loaned was also noticed. It was held that the dictionary meaning of term advance was premised on an outgoing or flow of money from the company to the shareholder; consequently, notional payments by way of book entries would not be included. It was held t .....

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vance by SISICOL. The amounts payable in the large running account was unremitted collection, and the relationship was that of a debtor and a creditor in respect of the trade debt but not one of a borrower and a lender. Reference was made to Schedule IX appended to the profit and loss account of SISICOL for the relevant period. He noted that the sums shown as due from the firm to the company was reflected in Schedule VII to the balance-sheet with the heading Cash, bank and other balances . Thus, .....

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he relevant time was ₹ 60,61,54,638/-, including ₹ 26.24 crores payable to SISICOL. The detail of ₹ 60,61,54,638/-, the amount payable is noted at page 25 of the order. Therefore, on facts, it could not be said that ₹ 1.88 crores loan given by the firm to the assessee was part of credit balances of the SISICOL with the firm. The CIT (A) held that 44 % of availability of funds with the firm could be said to belong to SISICOL. The Judicial Member stated that such inference .....

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n of ₹ 1.88 crores to the assessee. The Judicial Member further observed that the firm had been advancing interest free amounts to its partners, evident from the materials on record and that the details of repayment of loan by the assessee in the immediately succeeding year were made. He further noted that the assessee had taken loan from the firm right from 01.04. 1990, but the provision of Section 2(22)(e) was never invoked before by the Department. 8. It was concluded that the assessee .....

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llection exceeded on an average ₹ 10 crores per month. Consequently, it could not be inferred that amount retained by the firm was for the assessee s benefit. The credit balance of about ₹ 26 crores was natural and unavoidable in the circumstances of the case and had no nexus whatsoever with loan advanced by the firm to the assessee. The Judicial Member accordingly held that there was no receipt of deemed dividend in the hands of the assessee. 9. The Accountant Member, on the other h .....

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firm had advanced amounts to the assessee. The Accountant Member held that two transactions, one from company, SISICOL, to the firm, and from the firm to the assessee should be treated as a combined one, amounting to payment of loan from SISICOL, to the assessee. He held that the firm was only a conduit for the loan and that the firm s loan to the assessee had its roots in the credit balance of SISICOL. Reliance was placed in this regard upon T. Sundaram Chettiar v. CIT [1963] 49 ITR 287 (Mad) a .....

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nd further reserves and surplus of ₹ 1,84,19,305/- as on 31.3.1992. These facts and figures supported the conclusion that the roots of the loan from the firm, to the assessee lay in the credit balance of the company, SISICOL, with the firm. 10. Dealing with the question whether the credit balance of SISICOL with the firm, was a trade debt or not, the Accountant Member noted the exception to the definition of dividend in clause (ii) of sub-section 2(22)(e) and observed that it operated only .....

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SICOL and loan advanced by the firm to the assessee. 11. The third member to whom the matter was referred, after hearing the submissions of the parties concurred with the opinion of the Judicial Member. Consequently, the assessee s appeal was allowed. 12. The revenue argues that the majority opinion of the ITAT is erroneous, given the text of Section 2 (22) (e) and the object behind its enactment. Heavy reliance was placed on the order of the Accountant Member and of the Revenue authorities. Cou .....

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that once it was proved that a substantial amount i.e., ₹ 26,24,12,223/- stood to the credit of SISICOL, that some amounts were paid by the firm to the assessee reinforced the inference that they were out of that company s funds. Counsel submitted that Section 2 (22) (e) enacts a deeming fiction and that in such cases, it is open to the revenue to follow that fiction and not allow the mind to boggle at some intervening facts. Consequently, in reality, the firm being a device or mechanism .....

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ute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. Therefore, the Legislature realised that though funds were available with the company in the form of profits, the controlling group refused to d .....

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at payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the managing director of the company, L. Alagusundaram Chettiar, and was therefore assessable as dividend in the hands of the assessee. In the said judgment it has been held that the basic test to be applied in such cases is not whether the loan given is a benefit but whether payment by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Appl .....

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0 per cent. of voting power in MKSEPL during the block period. It is not in dispute that the assessee had substantial interest of about 16 per cent. in MKF. It is not in dispute that the three companies were controlled companies. There is one more point which needs to be mentioned. The timing of the so-called repayments by the company to MKF and MKI and the immediate withdrawal of the funds by the assessee-cum-director-cum-shareholder-cum-partner and the timing of investment in purchase of Bonds .....

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l of money by the assessee from his capital account, in the books of MKI, during the financial year 1999-2000 led to a debit balance of ₹ 8.18 crores as on March 31, 2000. To this extent, the finding given by the Assessing Officer and by the Tribunal remains unchallenged…. The five payments had direct co-relation with ₹ 5.99 crores paid by MKSEPL to MKF and MKI and payments by the said two firms to the assessee who used the said money to buy 9 per cent. RBI Relief Bonds. There .....

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ssessee urged this court to uphold the ITAT s majority view. He submitted that once there was a factual finding with respect to absence of nexus between the amounts payable to SISICOL and the balance of firm s moneys (which was in excess of ₹ 33 crores) there was no question of applicability of Section 2 (22) (e). Counsel submitted that although the provision creates a fiction, before proceeding to the logical conclusion the strict terms of the statute are to be construed and applied. 15. .....

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lders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses .....

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pany on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but " dividend" does not include- (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ii) any advance or loan made to a shareholder by a com .....

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efore the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.-The expression 'accumulated profits' in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in sub clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisiti .....

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ed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;" 16. The term dividend takes in any disbursal, by a company, of accumulated profits, distribution to its shareholders- by a company- of debenture stock, or deposit certificates in any form, (with or without interest), any sharing with its shareholders- by the company, on its liquidation, a .....

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, not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits holding not less than 10% voting power is deemed to be dividend. The second class of payment is by way of advance or loan to any concern in which such shareholder is a member or partner and in which he has substantial interest. The third class is payment by any such company for individual benefit of any such shareholders to the extent of which the company in either case possesses ac .....

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nst the whole or any part of sum previously paid by it and treated as a dividend under Section 2 (22) (e) to the extent of set off, is not dividend and therefore excluded. 18. In Commissioner of Income Tax v. C. P. Sarathy Mudaliar 1972 (83) ITR 170 (SC), Section 2(6A)(e) of the Income Tax Act, 1922, (which was identical to Section 2(22)(e)) was considered. There, members of a Hindu undivided family (HUF) acquired shares in a company with family s funds. Loans were given to the HUF and the quest .....

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ks of shareholder it refers to the registered shareholder. C. P. Sarathy Mudaliar was followed by the Supreme Court in Rameshwarlal Sanwarmal v. Commissioner of Income Tax 1980 [122] ITR 1. In that case, the company advanced the loans to the assessee-HUF who was the beneficial owners of the shares (in the company), though shares were registered in the name of the individual karta, who held them for and on behalf of the family. The Supreme Court held that the Hindu undivided family being only the .....

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tled to the share but he is certainly not a shareholder . It is only the person whose name is entered in the register of the shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company and not the person beneficially entitled to the shares. It is the former who is a shareholder within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered sh .....

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se of the revenue asking the ITAT and this Court to lift the corporate veil and see the reality, piercing the dissimulative position of the assessee is to be understood as its compulsion to deal with the text of Section 2 (22) (e), which enacts that a payment by a company… of any sum (whether as representing a part of the assets of the company- or otherwise) by way of advance or loan to a shareholder… and such shareholder being one who has a substantial interest in the company. It .....

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artner of the firm, which advanced the amount to him. However, the question of payment to the concern (in this case, the firm) is a matter that requires to be established. Here the factual findings are important. A sum may be a debt but not loan from company to firm or to the assessee. The assessee had relied on Bombay Steam Navigation Co. (1953) P. Ltd. (supra) and other decisions to say that there had to be outflow of funds. The third member who agreed with the Judicial member (and therefore s .....

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tly, if it is held that the two transactions were in fact one, i.e., loan represented funds of SISICOL, then the case of loan and advance stood established and Section 2(22)(e) applied. Unquestionably, the firm worked for the company as its agent. If an agent had given a loan or advance to the assessee for and on behalf of the company, then there was no need for anything else to be established to attract Section 2 (22) (e). The concomitant issue (with whether the transaction was one whole or sep .....

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with the firm. The firm did advance amounts to him. These facts, however, facially cannot result in an inference that the two transactions are one and that the assessee had adopted a stratagem of securing loan and advance from SISICOL through a conduit, viz. the firm. Apart from the surmise that the transaction was one and the same, the revenue had to probe further and establish from the material before it that the payments were part of a tax evasion ruse. Section 2(22)(e) pulls in notional or a .....

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advanced ₹ 1,88,96,202/- out of total available funds of more than ₹ 60 crores: which belonged to different parties though available with it i.e., the firm. This factual finding does not disclose any error or infirmity. 21. So far as the contention that the two transactions -one from SISICOL to the firm and the second from the firm to the assessee should be treated as one, is not based on any valid justification. The firm has a legal existence separate and independent of SISICOL. It .....

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poke for the majority view of the ITAT since he concurred with the Judicial Member, said: There is no nexus between funds of the company with the firm and advancement of loan to the assessee. In fact evidence, as pointed out by the learned Judicial Member, is to the contrary. He has pointed out that on April 25, 1991, ₹ 20 lakhs were advanced by the firm to the assessee. This amount could not have come out of credit balance of ₹ 26.41 crores which represented money collections in Feb .....

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in dispute that the firm was making on an average a collection of more than ₹ 10 crores per month through 290 centers spread throughout the length and breadth of the country and that time was taken in making accounts, reconciliation, trial balances and in providing other details of collection and in remittance of money to SISICOL. Having regard to the huge turnover, two months cannot be said to be unreasonable. This is what the learned Judicial Member has recorded and my attention has not .....

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during the assessment proceedings, the AO noticed that the assessee, a company received an advance of ₹ 6,32,72,265/- by way of book entry from one JGPL. The shareholders who had substantial interest in the assesse also had 10 % voting power in JGPL. The AO specifically took note of the shareholding pattern in the assessee-company as well as in JGPL. It was held that two individuals were members holding substantial interests in JGPL which had provided loans and advances to the assessee and .....

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h a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by a legal fiction created under section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to "dividend". Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to "shareholder". When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under .....

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e herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", then the Legislature would have inserted a deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned couns .....

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had taken a loan of ₹ 28,52,41,516/- from JP in which the assessee/firm had invested. The assessee had subscribed to the equity shares which constituted 48.18 % of the share capital. The shares were purchased in the names of two partners, N and S but the assessee-firm was the beneficial owner. The AO assessed the loan as deemed dividend under Section 2(22)(e) but the Tribunal set aside the order. On appeal, this court ruled in favour of the revenue, on the basis of a cumulative reading of .....

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the partner entering into the register of members of the company as shareholder, the said partner shall be the "shareholder" in the records of the company but not the beneficial owner as "beneficial owner" is the partnership firm. This would mean that the loan or advance given by the company would never be treated as deemed dividend either in the hands of the partners or in the hands of partnership firm. In this way the very purpose for which this provision was enacted would .....

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ich is a non-legal entity, it would be impossible for such a condition to be fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated March 31, 1975, interpreting section 187C of the Companies Act, relied on by the learned counsel for the assessee himself, a partnership firm is not a person capable of being a "member" within the meaning of section 47 of the Companies Act. It is further explained that since .....

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advance the revenue s cause in this appeal. Granted, the assessee is a shareholder of SISICOL; he is also a partner of the firm. However, neither did SISICOL give him the money nor did it advance the amount to the firm. The firm has an independent existence and it had over ₹ 60 crores in its account. That a significant part of it, i.e., 44% or over ₹ 26 crores was payable to SISICOL could not have blinded the revenue to the fact that the other amount was available and given as a loa .....

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hat the question of law framed has to be answered and is so answered in favour of the assessee and against the revenue. The appeal is consequently dismissed. WP No. 1162/2012 26. In this petition, the correctness of an order 11.04.2008 by which the revenue s application for rectification of the majority opinion, in view of the third member not noticing or wrongly appreciating important features has been challenged. 27. The revenue alleged that Judicial Member s order, especially para 45 was not .....

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d in the hands of the concerns and not of the assessee. The Revenue objected to the observations in the ultimate para of the third Member that the source of funds utilized for advancing loan to the assessee was not examined and no material was on record to prove that SISICOL s funds were used to advance loan to the assessee. Therefore, conditions of Section 2(22)(e) were not satisfied. Dealing with these submissions, the ITAT held that: 8. It is contended in the application that Third Member was .....

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